Monday Market Movement: Make or Break for the Nasdaq

Sometimes, you hit a critical point in the markets.

This week, the Nasdaq, which is the only index we have that hasn't had a death cross, has to break over its 200-day moving average at 4,971 and over the 50-day moving average at 4,957 in order to reverse the bearish trend of our major indexes breaking down.  If the Nasdaq can't do it - don't expect the other indexes to manage the trick on their own so it's all up to the Nasdaq, which means it's all up to Apple - because (AAPL) alone is 15% of the Nasdaq 100 (QQQ).  

As you can see from our Big Chart, the Nasdaq itself more than 20% above our Must Hold line at 4,000 and that outperformance is almost entirely due to AAPL's 100% run since we called these levels back in 2013 for this year's end.  With the Dow, NYSE and Russell pretty much at the lines we expected, the question is whether the Nasdaq and S&P are outperforming and likely to correct or whether the other indexes are underperforming and likely to catch up. 

Clearly AAPL argues for the Nasdaq Must Hold line to be raised and then we should probably bump the S&P as well, where AAPL is almost 4% of that index.  Usually, we don't make adjustments for individual components but Apple is so outsized, it's hard to ignore.  

For it's part, the Nasdaq took a very sharp, very nasty dive on Aug 24th - so sharp that there was no way to get out of positions in time as the index collapsed 10% in less than an hour led down, of course, by AAPL, which also fell 10% that morning.

3,800, where the Nasdaq found support, is the -5% line on our Big Chart and that line has, so far, been support for all our indexes as we've corrected.  Unfortunately, the market Fundamentals do not lead us to think we should be any more than 5% over our Must Hold levels, so we're still looking for a bit more of a correction before we get comfortable doing our bargain shopping.  Not that we haven't done a bit already - we've picked up a dozen new bullish positions this month but there's a lot we haven't pulled the trigger on yet, as they are still priced a bit high for our tastes.  

As you can see from Dave Fry's S&P chart, there's certainly nothing exciting about the S&P action since the big drop.  We fell from 2,100 to 1,850, which is 250 points and our 5% Rule™, tells us to EXPECT a weak bounce, which is 20% of the drop (50 points), back to 1,900 or a strong bounce, which is 40% of the drop, back to 1,950 and yes, we went past it to 2,000 (the Fibonacci bounce) but harshly rejected there so far is NOT a good sign and now we re-test 1,950.  It would be very BAD if that fails again.  

Be careful watching today's moves as well.  Friday's 1.7% drop in the S&P came with 207M volume on the S&P's ETF (SPY) and today being Monday, we're getting the usual low-volume pump-job in the Futures back to 1,962 - as if everything is AWESOME but we only care about what sticks and now we have a short-term move in the S&P from 2,000 back to 1,950 for 50 points, so 1,960 is a week daily bounce (as opposed to the monthly bounce above) and it will take a strong bounce to 1,970 to actually impress us.  

Still, it's all about the Nasdaq this week and, unfortunately, Apple got some bad news this weekend as the App Store was hacked for the first time.  It does seem to be localized to China and it may even be the fault of China's own web policies and not a flaw in AAPL's system but coming just as the new iPhones are rolling out is simply bad timing (or industrial espionage - potato potato).

It's too early to say how big or little of a deal this is but ANY deal that affects AAPL affects the Nasdaq and the Nasdaq is currently the fulcrum on which the whole market rests at the moment - so let's just say we prefer to lean a little on the cautious side at the moment!  

Meanwhile, the data reports for the week are going to be tough to navigate as well.  We have only Housing Data until Thursday when we get hit with Durable Goods, which are clearly in decline and Friday we get our third revision to Q2 GDP, which will also come down a bit from the last, silly, 3.7% estimate.  What bothers me most about GDP though, is that it counts rising inventories as a positive (on the assumption they'll be sold) but take a look at this chart, which shows our Inventory to Sales Ratio is now as bad as it was during the crashes of 2001 and 2008:

When businesses are flooding with inventory they are forced to mark down prices and we're already seeing that in our CPI numbers and, so far, that isn't spurring demand (and a similar situation is happening in the energy sector) and the next step is already in progress as production begins to shut down.  And what happens when too much production is shut down?  Job losses!  

We'll be getting the ISM report on October 1st, Factory Orders on the 2nd, Trade Data on the 6th, Import and Export Prices on the 9th, PPI on the 14th, CPI on the 15th and, finally, Industrial Production on the 16fh but we just had that report last week and it was down 0.4% in August, which is TERRIBLE but, unlike July's +0.9%, it was realistically in-line with the rest of this TERRIBLE year.

Look, I'd love to be more bullish.  I'd love to sit here like a gibbering idiot and scream BUYBUYBUY!!! and get all kinds of attention for all my happy talk that leads the lemmings off a financial cliff as they plow into stocks at prices that simply DO NOT reflect the reality of the market but I take my job a lot more seriously than that and, when I don't think it's wise to trade - I'm going to tell you it's not wise to trade.  

You don't get good "ratings" telling people to stay in cash.  The brokers don't want to advertise on sites that tell people not to trade which is why we don't like to rely on them for advertising.  What we care about is PROTECTING our assets and CASH!!! is a very good way to do that at the moment - especially with our Fed on hold, heading towards tightening while the ECB and BOJ are likely to ease further.  

Dollars are also assets that go up and down and I'd say we're setting up to make another run at 100, which is 5% higher than here and you can play that by taking a bullish position in the Dollar ETF (UUP) or, you can just go to CASH!!! in your portfolio and sit on the sidelines while your Dollars gain in value - that's kind of relaxing actually!  

We're firmly on the sidelines today and we'll see where this nonsense ends up, tomorrow will be a FREE Live Trading Webinar at 1pm, EST where we'll do a broad market overview - watch our Twitter Feed or Facebook Page for more details.